Ownership Structure and Performance of Listed State-Owned Enterprises Vis-à-Vis Comparable Private Enterprises: Evidence from India
Article Details
Pub. Date
:
Jul,
2015
Product Name
:
The IUP Journal of Corporate Governance
Product Type
:
Article
Product Code
:
IJCG11507
Author Name
:
Malla Praveen Bhasa
Availability
:
YES
Subject/Domain
:
Management
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:
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of Pages
:
18
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Abstract
There are multiple reasons for state to own control of industry. Profit making may or may not be one of them. Researchers have conducted empirical studies on the performance of State-Owned Enterprises (SOEs) vis-à-vis private ones and to a large degree concur that SOEs underperform in comparison. The Indian government has realized that SOEs are a drag on the economy and hence have engaged in privatization and sell-out efforts. Still, the Indian state owns about 277 enterprises, of which 46 are listed on Bombay Stock Exchange (BSE). Theoretically, listed SOEs are subject to the same market scrutiny and discipline as are the private listed companies. This study at first explains the rationale behind the state’s ownership of industry and how SOEs are organized in India, following which it compares the performance of the listed SOEs with their private competitors. For a better comparison, private firms that mimic SOEs in terms of ownership concentration are picked for the study. The findings show that the SOEs perform marginally better than their private counterparts. It is concluded that their better performance could be due to the oligopolistic conditions they operate in and as also possibly because of their business age.
Description
State-Owned Enterprises (SOEs) have been the subject of continuing debate in corporate
governance literature for a long time now. Their performance has often been compared with
private enterprises and arguments advanced on the existence of efficiency and profitability
differences. Inefficiencies persistent in SOEs, it is argued, could be best addressed through
privatization (Sheshinski and Lopez-Calva 2003; and Omran 2004). In the early 1990s, most
Central and East European economies transitioned from state-ownership of enterprises to
private ownership. In the developing economies too this transition was evident.
Beginning 1991, India has been making concerted efforts to devolve state ownership of
some corporations to the private sector. While divestment has been argued as the only available
alternative to get rid of unproductive state enterprises, owing to either the strategic nature of
some industrial sectors or due to multiplicity of objectives that are not necessarily value
enhancing, the Indian government has retained a vast majority of enterprises under its direct
control. Most such enterprises are controlled by parent ministries and managed by career bureaucrats. Interestingly, some of them are listed on the stock exchange and therefore are
subject to the prevailing market regulations. It is the performance of such listed SOEs that is the
focus of the present study as they can be relatively strongly compared with their private peers.